Robert J. Shiller with Eugene F. Fama and Lars Peter Hansen have shared the 2013 Nobel Prize in Economic Sciences for their research on how the market prices of assets such as stocks move.

The three laureates, all Americans, “laid the foundation for the current understanding of asset prices,” the Royal Swedish Academy of Sciences, which selects the winner, said today in Stockholm. “It relies in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions.”

Their work spans almost 50 years of research, beginning with Fama’s finding that it’s difficult to predict price movements in the short run, a conclusion that contributed to the development of stock-index funds. Later work by Shiller and Hansen focused on longer-run price swings and the extent to which they could be explained by such fundamental features as dividend payouts on stocks and the risk appetite of investors.

His Economic Literature

In his best-selling Irrational Exuberance, Robert Shiller cautioned that society’s obsession with the stock market was fueling the volatility that has since made a roller coaster of the financial system. Less noted was Shiller’s admonition that our infatuation with the stock market distracts us from more durable economic prospects. These lie in the hidden potential of real assets, such as income from our livelihoods and homes. But these ”ordinary riches,” so fundamental to our well-being, are increasingly exposed to the pervasive risks of a rapidly changing global economy. This compelling and important new book presents a fresh vision for hedging risk and securing our economic future.

Shiller describes six fundamental ideas for using modern information technology and advanced financial theory to temper basic risks that have been ignored by risk management institutions–risks to the value of our jobs and our homes, to the vitality of our communities, and to the very stability of national economies. Informed by a comprehensive risk information database, this new financial order would include global markets for trading risks and exploiting myriad new financial opportunities, from inequality insurance to intergenerational social security. Just as developments in insuring risks to life, health, and catastrophe have given us a quality of life unimaginable a century ago, so Shiller’s plan for securing crucial assets promises to substantially enrich our condition.

Once again providing an enormous service, Shiller gives us a powerful means to convert our ordinary riches into a level of economic security, equity, and growth never before seen. And once again, what Robert Shiller says should be read and heeded by anyone with a stake in the economy.

Review:

“Shiller’s ambition is exhilarating, and gives his work something that most business books lack; a deep sense of how economic ideas might transform people’s everyday lives.”–The New Yorker

“It is an understatement to say Shiller’s book raises complex political, legal and economic questions. Some will probably never happen. But The New Financial Order is still worth a look. It casts some long-standing social problems in a new light, and it puts some fascinating ideas on the table.”–Andrew Cassel,Philadelphia Inquirer

“While [his] ideas may sound unfamiliar–even radical–Shiller’s reasoned case recalls earlier financial innovations such as stock and futures markets, life and unemployment insurance, and earned income tax credits. The earlier innovations addressed the financial and risk management needs of individuals and societies in the same way Shiller proposes for his concepts.”–Library Journal

“The good news, on Professor Shiller’s analysis, is that it is now possible to conceive and construct trade-able indices that will allow insurers to offer protection against such things as industrial decline and demographically-induced pension shortfalls. If we all knew such insurance was available, we could afford more risks with our choice of career, to the benefit of the economy. Creativity is the lifeblood of capitalist economics. Emotional worries about the risk of unemployment are one of the biggest threats to continued innovation. . . . The data and technology to make a market in such things exists. All that is lacking, Professor Shiller says, is the will to make them a commercial reality.”–Jonathan Davis, The Independent